By Raissa Kasolowsky

DUBAI, Aug 2 (Reuters) - Rising al Qaeda militancy, a surge
in violence in a secessionist south and crushing poverty will be
this year's critical tests for Yemen, neighbour to top oil
exporter Saudi Arabia.

Yemen, also trying to cement a truce to end a northern civil
war, has been a major Western security concern since a
Yemen-based regional arm of al Qaeda claimed responsibility for
a December attempt to bomb a U.S.-bound plane.

Worries over instability in Yemen along with widespread
corruption mean there is no significant foreign investment
outside the country's oil industry and little chance of
attracting any in the near future.

This is further exacerbating high unemployment in Yemen,
with nearly a third of the workforce out of a job, leaving more
than 40 percent of the country's 23 million strong population
surviving on under $2 a day.

"Yemen's problems are all simultaneous and would be
overwhelming for any state," said Theodore Karasik of the
Institute for Near East and Gulf Military Analysis.

"Only after the central government is able to address some
of these issues more sharply will they start to go away. A lot
of the international aid promised is not materialising so Yemen
will remain a basket case, if you will, in the short term."

AL QAEDA AND ISLAMIC MILITANCY

Al Qaeda and the Yemeni government have clashed for many
years, but bloody confrontations between militants and security
forces are on the rise again as the group stages increasingly
bold attacks on international and domestic targets alike.

In June and July, al Qaeda militants carried out a number of
attacks on state targets in southern Yemen, including a hit on
the headquarters of an intelligence agency in the port city of
Aden, in which 11 people died.

Yemen's poorly equipped security forces are easier to strike
than many Western targets, and the group may hope to capitalise
on anti-government sentiment in the south, home to a strong and
growing separatist movement.

Yemen's Western allies and Saudi Arabia have long feared al
Qaeda is exploiting unrest to turn the country into a launchpad
for destabilising attacks in the region, and the failed December
plane attack set off alarm bells across the globe.

Sanaa subsequently declared war on al Qaeda, and Washington
stepped up training, intelligence and military aid to Yemeni
forces, helping them stage deadly raids on suspected militant
hideouts, some of which have also killed civilians.

But an assassination attempt against the British envoy to
Sanaa in April and June's brazen suspected al Qaeda assault on
the southern headquarters of a Yemeni intelligence agency raised
doubts over the reach of the government's crackdown.

Sanaa has battled al Qaeda since before Sept. 11, 2001
attacks on the United States, often in concert with Washington,
but many saw the Yemeni government's approach to dealing with
militants as half-hearted and ineffective.

Wanted suspects went uncaptured and foreign Islamists were
able to attend training camps in Yemen's impenetrable mountains
and deserts, where they also benefitted from tribal protection.

Al Qaeda activity in Yemen picked up in 2009 after the Saudi
branch of the militant group, licking its wounds from a
crackdown by Riyadh, merged with the Yemen arm to create a
Yemen-based regional wing, now mounting a resurgence.

The leaders of the Al Qaeda in the Arabian Peninsula include
Nasser al-Wahayshi, once a close associate of Osama bin Laden.
Its declared aim is to target Westerners in the oil-exporting
Gulf region and bring down the Saudi royal family.

In August 2009, an al Qaeda suicide bomber tried to kill
Saudi Prince Mohammed bin Nayef, who headed an anti-terrorism
campaign that derailed militant efforts to destabilise the
kingdom between 2003 and 2006.

What to watch:

- Any more violent attacks on international and domestic
targets as al Qaeda responds to a U.S.-backed crackdown.

- Increased foreign assistance in Yemen's fight against al
Qaeda may backfire as public opinion swings against the state.

SOUTHERN SEPARATISM

Mounting violence in south Yemen in recent months, from
separatist ambushes to brutal shakedowns and armed clashes with
security forces, has raised fears that a sustained separatist
insurgency may be brewing.

North and South Yemen formally united in 1990 but some in
the south, where many of Yemen's oil facilities are located,
complain northerners have used unification to seize resources
and discriminate against them.

People in the south say the government deprives them of jobs
and usurps their land. Key positions in the south are typically
assigned to Sanaa loyalists, often imported from the north.

Many southerners believe they were better off before unity,
when South Yemen was part of the socialist bloc and a welfare
state established with Soviet aid. They say discrimination
became worse after a brief 1994 civil war, sparked by an attempt
by southern leaders to break away from a unified Yemen.

The violence of recent months is the worst the south has
seen since the 1994 war and could escalate unless Sanaa quickly
moves to address southern grievances.

Sanaa has offered dialogue with Yemen's opposition,
including southerners, but efforts to calm southern unrest have
included widespread arrests and extra troop deployments to the
region that have actually heightened hostility toward the north.

Suspected separatists have attacked state vehicles while the
army has surrounded and shelled the flashpoint southern town of
Dalea and clashed with separatist protesters.

Both sides trade blame for the violence in a heavily armed
society where state control is weak. Separatists insist their
movement is peaceful and any fighting is self defence.

Meanwhile, the government of President Ali Abdullah Saleh
says armed separatists are a minority of outlaws who
indiscriminately and sometimes brutally target northerners.

What to watch:

-- Spiralling violence as a growing number of southerners,
angered by a government security clampdown, take up arms.

-- Grinding poverty and unemployment may also push more
southerners to join armed secessionists.

CONFLICT WITH NORTHERN SHI'ITE REBELS

Yemen is working to cement an increasingly shaky truce with
northern Shi'ite rebels sealed in February to end a civil war
that has raged on and off since 2004 and drew in neighbouring
Saudi Arabia last year after rebels seized some Saudi land.

The rebels, who belong to the minority Zaydi sect of Shi'ite
Islam, complain of religious and socio-economic discrimination.

The ceasefire with the rebels, which has included prisoner
releases by both sides, has largely held but is growing more
fragile and has been punctuated by sporadic violence.

Previous truces to end the war, which has displaced 350,000
people, have not lasted and analysts are sceptical whether this
one will hold for the long term.

What to watch:

-- Sporadic violence may deteriorate to full-blown conflict.

-- Rebels regroup and restart their campaign.

DECLINING ECONOMY, RESOURCES CRUNCH

Almost a third of Yemen's 23 million inhabitants suffer
chronic hunger, jobs are scarce, corruption is rife and oil and
water resources are drying up.

The government is almost powerless to meet the needs of its
expanding population and there are fears that if the state cannot
pay public sector wages Yemen may tip into chaos.

Oil revenues are declining steeply and the government said
earnings from Yemen's multi-billion dollar Total-led liquefied
natural gas (LNG) plant will be less than expected in 2010 due
to a delay in the production start-up.

A tumble in the Yemeni rial further added to the country's
economic strain, forcing the central bank to inject some $850
million into the market in 2010 to support the currency.

Despite some Western and Saudi support, donor money is hard
to come by and once obtained is slow to reach those who need it
most. Only a fraction of $4.7 billion pledged at a donor
conference in 2006 has been distributed so far.

Corruption also pervades life in Yemen.

As part of badly needed economic reforms, Yemen has begun
reducing fuel subsidies, a huge burden on state finances, but is
having to do this gradually to avoid stoking public anger.

In 2005, the government was forced to reverse sudden hikes
in gasoline, diesel and kerosene prices after 22 people were
killed and more than 300 wounded in resulting riots.

Yemen also faces a water crisis, deemed among the worst in
the world and worsened by excessive irrigation by farmers
growing qat, a mild narcotic leaf that dominates life in Yemen
and whose consumption weighs on productivity.

What to watch:

-- Any signs the central government may run out of cash
resources to keep economy and public sector afloat.
(Editing by Samia Nakhoul)